This paper provides a new approach to a utility function, by deriving it from deeper first principles. Using a minimum set of cognitive tools, one can evaluate choice options and their expectations using solely information from one’s past and present environments. The adaptive evaluation procedure results in one’s utility function being isomorphic to a perceived rank of its magnitude within a reference set, and thus provides a mechanism for one’s apparent attitudes towards risk to be shaped entirely by one’s experiences, memory, and cognitive imperfections. This conceptually simple, but powerful, framework provides support for neoclassical utility theory as a special case, but also rationalizes reference-dependence and social comparisons. Cognitive imperfections have unexpected effects on choice under uncertainty and economic welfare. The proposed parsimonious model links recent developments in economics, psychology, and neuroscience, and shows that environmental context, memory, and cognitive processes may interact in non-trivial and economically relevant ways.
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